Many business owners mistakenly think the main difference between a contractor and an employee is how many hours they work. If you need only a few hours of help, find a contractor. For part-time or more, hire an employee. The truth is the decision is a lot more complicated. It’s possible to work full-time as a contractor and only a few hours as an employee.
Instead, the difference is more apparent in how your new hire works. A contractor operates as an independent entity. An employee is expected to work according to a specific method and time.
Understanding the difference between a 1099 contractor and a W-2 employee is crucial to complying with Federal and state employment laws. Some states, like California and Illinois, are cracking down on businesses that misclassify staff. “Contractors are supposed to be their own business owners who provide a service to your business. They should have their own business and be able to contract to other group practices,” says Maureen Werrbach, LCPC, a therapy group practice owner in Chicago and founder of Group Practice Exchange.
As for the amount of risk you take on when hiring an employee or a contractor, you could be found liable for both of them. Be sure your professional liability insurance plan provides you with blanket coverage. Healthcare can be a revolving door of staff, and a blanket plan protects you from risk for incidents that occur with contractors, employees or even volunteers.
Questions to determine if you need an employee or contractor
A new Department of Labor (DOL) rule from January 2024 and effective March 11, clarifies six factors to determine whether a worker should be classified as an employee or independent contractor under the Fair Labor Standards Act (FLSA or Act).
The six factors are:
- Opportunity for profit or loss based on managerial skill.
- Investments by the worker and the potential employer.
- Degree of permanence of the relationship.
- Nature and degree of control.
- Extent to which the work performed is an integral part of the potential employer’s business.
- Skill and initiative.
The questions are considered as a whole, so failing to meet some of the six does not necessarily mean you are misclassifying staff. Your state may have more stringent employee classification rules.
The following are questions to consider when deciding whether to hire an employee or an independent contractor for your healthcare practice.
Are you just starting to grow or trying to scale?
If you have more work than you can handle and are considering getting help, you may want to start with a 1099 contractor. This allows you to test the waters to see how much you want to grow your business or expand your services. There’s less commitment with 1099 contractors because you can terminate them by ending a contract.
An example of expanding services with a 1099 employee is adding an occupational and speech therapist to your physical therapy services.
If you are looking to scale your model of service, you’ll need employees who can replicate the way you operate.
Is the person your agent or operating independently?
Independent contractors operate according to their own expectations. If you’re a therapist or a physical therapist, you can’t hire a new person and tell them how to do therapy. This is what the “nature and degree of control” rule means.
You also shouldn’t supervise independent contractors. You can have discussions as you would with any other colleague, but you can’t tell them how to do the job. Your only recourse is to let them go when it’s not a good fit.
If workers can earn profits or suffer losses by taking on tasks or declining them, they are contractors. If you set the expectations for the workload and deadlines, this is more likely an employee.
If you’re looking to train someone to be a culture fit for your organization, hire a W-2 staff member. This is what the DOL “Skill and initiative” rule means.
How much time is the staff member working for you?
A 1099 contractor is a business owner. According to the DOL, “The term ‘independent contractor’ refers to workers who, as a matter of economic reality, are not economically dependent on an employer for work and are in business for themselves.”
This means you are the client. If your staff member only works for you and is not free to work for other practices, that is an employee relationship.
Contractors need to be able to work on their own schedules. Work is sporadic and typically project-based with a fixed end date.
That means if you have a brick-and-mortar business, you can tell a contractor when the space is available to provide services, but you can’t place demands on their schedule the way you set work hour expectations for employees.
How integral is the task for your business?
Consider specific tasks when defining the DOL rule about how important a specific role is to your business. This is not dependent on any individual person but on the actual role. For example, adding a chiropractor contractor to your therapy service line is not integral to your actual business — it’s an expansion of it. Adding front desk support who works solely for you on managing all appointments is integral because you can’t provide your services without that role in place.
Expanding your services is an exciting and often necessary step in owning a healthcare practice. Spend some time at the start to ensure you find the right staffing model for your business.
Note that this post is not meant to serve as legal advice. Click here to learn more about liability insurance tailored to your practice needs.
